Cubist new convertible emerges; Vical zooms; Isis climbs; ISTA off despite news; CollaGenex climbs

By Ronda Fears

Memphis, May 30 - The wind was let out of the sails for biotech players hoping that the upswing in the sector would extend into summer and forestall a drought.

"Mr. Market was speaking today and said he is not impressed with the recent euphoria," said one sellside trader at a bulge bracket firm.

The Nasdaq Biotechnology Index did a complete turnaround, dropping 2.11% on Tuesday after gaining 2.07% on Friday. But the trader said that when the biotech sector comes back into vogue it likely will be "the" hot spot of the market.

"The commodity boom was the top financial news of the first half of 2006," he said. "It looks like a rally in the biotech sector could be the top second half story."

There were several renegade biotech stocks taking off amid the widespread downturn in the sector, most due to nicely priced PIPE deals or product news. Cubist Pharmaceuticals, Inc. extended gains from last week on approval of a label expansion for its antibiotic Cubicin but dropped in after-hours trade on a new convertible bond that hit the tape.

Cubist is pitching $275 million of convertible subordinated bonds talked to yield 2.25% to 2.75% with an initial conversion premium of 25% to 30%. Proceeds are earmarked to repay existing debt, for research and development and for general corporate purposes. The company has a 5.5% convertible in play that comes due in November 2008. The 5.5s shot up to 98 on Friday.

Cubist shares (Nasdaq: CBST) added 48 cents on Tuesday, or 1.88%, to close at $26.03 but pulled back in after-hours trade on the new deal. At 4:56 p.m. ET, the stock was seen off by $1.50, or 5.76%, at $24.53.

Cubist's deal - for Wednesday's business - was not a big surprise to players in that name, however. A market source in the convertible market had suggested Friday that the signs were signaling a deal, particularly as it would need to boost marketing for Cubicin with the label expansion. On Tuesday remarks mirrored that line of thought.

"It wasn't a surprise at all," said one convertible market source after the Cubist deal emerged.

"The credit's gotten a lot better after they got the approval. It's not totally unexpected, but they really moved quickly."

Vical up 8% on PIPE deal

Vical Inc. has concluded a $6.9 million private placement with AnGes MG Inc. - the first tranche of a total $10.85 million deal that makes up roughly half of a $22.6 research and development pact with the Japanese biotech.

AnGes bought 1,061,539 shares at $6.50 each and will buy another $3.95 million in stock at a price equal to the volume weighted average price for the 30 trading days before the second closing, which will occur after Vical shareholder approval. The deal was inked last Thursday, according to an announcement by the company Tuesday.

Vical shares (Nasdaq: VICL) shot up by 47 cents Tuesday, or 7.73%, to $6.55. The stock closed Friday at $6.08, off slightly from $6.15 on Thursday.

San Diego-based Vical has agreed to work with AnGes on its Allovectin-7R cancer immunotherapeutic. Under the agreement, AnGes will fund the phase 3 pivotal trial, which will be conducted in the United States, and will retain marketing rights for Allovectin-7R in certain Asian countries.

Vical will receive royalties of up to $77.5 million in total sales milestones based on the net sales in those Asian countries. The total funding will be $22.6 million with a portion of that coming from the private placement.

Vical story beyond bird flu

"Up to $100 million in funding is quite a lot. AnGes also targets more then just the melanoma market. AnGes is one of the leading biotech companies in Japan," said a buyside market source in Atlanta. "With this deal I have to raise my target now from initially $8 by year-end to double digits."

The most important effect of this deal is that it lends credibility to management, said a sellside trader.

"To me, this is much bigger than bird flu because it says management hasn't been bullshiting about due diligence in negotiation on A-7 [Allovectin-7R]. High credibility and good tech equals a high multiple."

Vical is also working on an influenza vaccine and earlier this month said its flu vaccine protects mice and ferrets against the feared H5N1, or bird flu.

The trader said that since the AnGes deal does not include Europe, having an Asian partner will legitimize its pursuit of a European partner.

"Generally I think this is a biggie for Vical because of the very good royalty sharing model. [It's] also interesting that both AnGes and Vical people are sitting in the a7 [Allovectin-7R] control committee, meaning they [are] also watching the U.S. trial," the trader said.

"Biotech sentiment generally is really lousy - most of the Vical peers lost half of its value - so once the sentiment relaxes Vical should go double-digit."

Isis up 6% on equity line

Isis Pharmaceuticals, Inc. shares soared Tuesday on news that it has received a $75 million equity line commitment from Azimuth Opportunity Ltd.

"From the looks of this, these institutions are lining up begging Isis to call on them first when Isis wants to sell shares. The $75 million amount also screams out with Isis being ready to quickly repay the buy-back provision with the Symphony deal if and when desired," said a sellside trader on the West Coast.

In April, Isis said Symphony Capital Partners LP and a group of co-investors have formed Symphony GenIsis Inc., capitalized with $75 million to develop Isis' cholesterol-lowering drug, ISIS 301012, and two novel drugs from its metabolic disease program.

Isis shares (Nasdaq: ISIS) zoomed higher by 42 cents, or 5.97%, to close Tuesday at $7.46.

Carlsbad, Calif.-based Isis will use proceeds from the Azimuth deal to advance ISIS 113715 for the treatment of type 2 diabetes and two other preclinical drugs - ISIS 369645 for the treatment of asthma and ISIS 353512 for the treatment of cardiovascular disease and inflammation - into clinical trials.

In addition, Isis said the Azimuth funds will be used to accelerate the commercialization of its IBIS biosensor system, the IBIS T-5000.

ISTA drops 7% despite news

ISTA Pharmaceuticals, Inc. announced Tuesday that it is beginning phase 3 clinical trials of a new once-daily formulation of Xibrom for ocular pain and inflammation following cataract surgery, but it failed to keep the stock from falling victim to the downswing in the biotech sector.

"ISTA experienced unusually high daily trading volume last week and again today," said a sellside market source. "The sell-off with the market I think makes a tough argument for a buy on the downswing but it's hard to get excited about this one."

ISTA shares (Nasdaq: ISTA) dropped 42 cents on the day, or 6.93%, to settle Tuesday at $5.64. Volume was 162,129 versus the three-month running average of 83,742 shares.

Irvine, Calif.-based ISTA said it is starting two phase 3 clinical trials of a new proprietary once-daily formulation of Xibrom for pain and inflammation following cataract surgery. Twice-daily Xibrom has been approved by the FDA for inflammation and pain following cataract surgery.

ISTA said it expects the clinical trials will be concluded in fourth quarter with preliminary results available in early 2007 with a supplemental New Drug Application filing later in 2007.

Wall Street has been difficult to impress when it comes to ISTA, the sellsider remarked.

"Profitability is now out to 2008 at the earliest, and then it's a slim chance of breakeven. Then what happens? Xibrom goes generic in 2009 and ISTA loses 50% of revenues overnight," he said. "And don't forget the company is nearly out of cash."

Analysts have acknowledged positive data on two pipeline products in recent months but also note that Xibrom has managed to sustain only small sequential growth.

CollaGenex climbs 7%

CollaGenex Pharmaceuticals, Inc. shares jumped by more than 11% on Tuesday after the FDA approved the company's drug Oracea to treat the inflammatory skin lesions of rosacea, but the stock eased back by the close amid a trading frenzy.

"CollaGenex is a low float stock with a huge pile of cash and no debt. I suspect the stock takes a large move up before the sales start flowing in this summer," one trader said.

CollaGenex shares (Nasdaq: CGPI) gained 82 cents on the day, or 7.02%, to settle at $12.50. The stock traded as high as $13.84 before easing back amid heavy volume of 3.2 million shares versus the norm of 130,131 shares.

On the FDA approval news, the company also moved the product's launch to July from September. Newtown, Pa.-based CollaGenex estimates the U.S. market for Oracea is about $500 million.

In 2005, CollaGenex had revenue of $26.4 million. In May, the company reiterated a 2006 revenue outlook of $21 million and assuming a September launch date for Oracea said it expects sales of $6 million for the drug.

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